As you have likely come to discover, investing can be a tool for building wealth, but it can also be used to store/maintain wealth. Generally, to achieve these two outcomes, investors must approach the stock market with different strategies in mind. Those who intend to maintain wealth tend to focus on long-term investment strategies rather than making short-term “plays.” As such, while there is no way to 100% guarantee returns for any investor using any strategy that currently exists, there are some principles that seem to be universally accepted by professionals. Here are some principles that are often considered to be fundamental staples of long-term investing:
Don’t Blindly Follow “Tips”:
The more involved you get as an investor your chances of engaging with other individuals who are interested in investing increase. As such, it is not uncommon to run into people who have “hot tips” regarding the newest and best investment to make. However, even if the tip comes from somebody you usually trust — such as a relative or friend — it is not wise to automatically accept the tip as fact. Instead, it is more beneficial to do your own research to understand why somebody believes that an investment opportunity is a great one. Remember, a “hot tip” from somebody does not automatically mean that they are wrong either. In fact, the relative or friend in question might be correct. That said, it is your responsibility to manage your own money. Taking tips from non-professionals is putting your money in the hands of another amateur, making the situation more similar to gambling than it is investing. Nearly all professionals agree that, in the long-run, the more informed investors tend to perform better.
Over-Activity Can Hurt You In The Long-Run:
When using a long-term investing strategy, it is important to remember that there will be short-term ups and downs in the market. Therefore, learning to pay attention to the big picture and not panic each time there is a dip in the negative direction is crucial. That said, there are some individuals who capitalize from these types of market fluctuations through the use of active trading. Although, if the ultimate goal of your strategy is to maintain wealth and realize growth in the long-term, overly active trading can actually hurt your earnings. This is true because trading allows for the possibility of human error and missed gains if the trading hypothesis is incorrect. For instance, if you held 1 share of Company A’s stock at $10 and it rose to $15 in a single day you might be tempted to sell if you expected that the stock price would fall again and profits could be made from the opportunity. However, if you decided to sell your share at $15 and it continued to rally — forcing you buy it back at $20 within the next week —you would be at a net loss of $5. Conversely, had you held your original position the entire time, you would have earned a net profit of $10 rather than any loss at all. In this scenario, chasing an opportunity would cost you an opportunity.
Do Not Rely Too Heavily on Any Single Valuation Tool:
When earnings are good and things seem to be working out, it often becomes easy for investors to become complacent with their strategy. This is dangerous because markets change over time and even the best investors are constantly shifting their strategies to fit the current market climate. Additionally, great investors do not rely on single valuation tools to make decisions, but rather, use a multitude of tools to become better informed. Unfortunately, though, many people do fall into the trap of becoming comfortable with a single tool and rely too heavily on it. For example, many investors put too much emphasis on price to earnings ratio because it is relatively simple and can be effective. That said, for a P/E ratio to be accurate it also must be evaluated within the context of the individual company in question. Further, a high P/E ratio does not always mean a stock is overvalued and a low P/E ratio does not automatically mean that one is undervalued either. It is always important to consider the full picture.
Throughout your journey as an investor, you will likely go through phases during which you will take on different investment strategies. Fortunately, it is completely normal and acceptable to do so! No matter what your strategy is, the most important thing is to have a strategy and follow it. Moreover, doing your own research will allow you to do so more accurately. Ultimately, you will likely find the most success when you are taking control over your own investments!